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Tuesday, April 16, 2013

Gold and Silver charts: an update

Gold Chart Pattern

Two weeks back, the analysis of gold’s 6 months daily bar chart pattern contained the following cautionary comments: “Gold’s price is trading below its three EMAs and is in a bear market. Rallies may be used for selling … In longer-term weekly chart, gold’s price is trading above its rising 200 week EMA. The long-term bull market is still intact. However, the 20 week EMA has crossed below the 50 week EMA for the first time in 3 years. That is a bearish sign.”

On the 3 years weekly bar chart pattern of gold (above), a break down below the 1525 level – which had acted as a support in Sep ‘11, Dec ‘11 and May ‘12 – followed by a sharp fall below the 200 week EMA, may have hit the last nail in the coffin of the decade-long bull market.

What caused the sudden fall? One theory is the fresh dose of QE in the Japanese economy that led to a devaluation of the Yen, which in turn, caused profit booking since the Yen value of gold spiked up. Impending sale of gold by Cyprus – reportedly as much as 10 tons, or, breach of a technical support level (1525) may have caused a rush for the exit doors.

Looking for causes is a futile exercise. Some times prices fall due to their own ‘weights’ – specially when they had stayed up too high for too long. Weekly technical indicators are looking bearish and oversold. Any upward bounce towards the 200 week EMA is likely to be met with more selling.

Silver’s price had broken down below a narrow range two weeks ago, and was poised just above its 200 week EMA. However, the long-term weekly moving average could not provide any support.

After falling below the 200 week EMA, silver’s price dropped below the 26 level that had provided support back in Sep ‘11, Dec ‘11 and Jun ‘12. Breach of a long-term technical support level is often followed by heavy selling, as bulls cover their long positions and bears open up shorts.

Weekly technical indicators are bearish and looking oversold. Any upward bounce towards the 26 level is likely to cause more selling. The next support level is 20, but that support is unlikely to hold for long.